Our results suggest that tightening disclosure requirements and using a centralized regulatory authority have successfully reduced abnormal trading activity, but switching insider trading from a civil to a criminal offense has increased this activity, likely due to the greater burden of proof required for prosecution. Insider trading is an aspect of financial market regulation that governments want to target. New Zealand is no different, with an insider trading regime beginning with the Securities Markets Act 1988.
The second amendment to the law came into effect on February 29, 2008, with the main effect of changing insider trading from a civil offense to a criminal offence. This strengthens the conclusion that insider trading is an important component of abnormal pre-announcement trading activity. We extend the analysis to look at the effectiveness of two insider trading law changes in New Zealand over the period, and whether they successfully reduced abnormal trading ahead of earnings announcements.
However, another legislative change during this period, which changed insider trading from a civil to a criminal offense, appears to have adversely affected the market by increasing the burden of proof required to prove insider trading. The first major attempt to regulate insider trading in New Zealand was made in 1988 with the enactment of the Securities Markets Act.3 The general consensus on New Zealand's insider trading regime is that it has failed (Walker and Simpson, 2013) as it embodies the fact that no person has been successfully prosecuted. The combined effect of these two major changes should lead to a reduction in insider trading activity due to the increased likelihood of being caught and a reduction in the windfall profits available from insider trading.
The second amendment had the main effect of changing insider trading from a civil to a criminal offense and came into force on 29 February 2008 by amending the Securities Markets Act 2006 (SMAA 2006).
Data
If the abnormal trading a week earlier is partly due to the informed trade, we will observe the change of VPIN during these two time windows. the companies included in our sample. Our sample covers nine industries, including Finance, Consumer, Transport, Investment, Real Estate, Commodities, Energy, Media and Telecommunications and Primary. On average, the firms in the financial industry have the largest capitalization, while the firms in the Goods industry have the smallest market capitalization.
7), each event is split into quintiles based on abnormal earnings changes for that year, with the top quintile representing the largest abnormal earnings changes and thus used as our proxy for 'good news', and the bottom quintile 'bad news'. Consistent with the business cycle, the aggregate change in earnings per share is negative in 2000 and 2001 (the dot-com bubble crash), 2008 and 2009 (the subprime financial crisis), and 2012 (the European debt crisis).
Empirical results
We focus on the "good news" announcements for the reasons stated in the above section. However, the results for the period after the second legislative change (post-SMAA 2006) tell a different story (see Table 6). To test whether there is a change in informed trading prior to earnings announcements, we calculate the daily VPIN for the period beginning 7 days prior to the announcement and ending 1 day prior.
The change in informed trading for the “good news” category is significant at the 10% level in period 2, but is significant at 5% in period 3. 7The appendix reports abnormal and cumulative abnormal returns for the period starting 7 days before the announcement and ending 7 days after that for companies in the NZX All index for these groups. This table reports the average abnormal (AR) and cumulative abnormal returns (CAR) for the period starting 7 days before the announcement and ending 7 days after the announcement, for 111 companies in the NZX All Index for the period January 1998 - March 2014.
The announcements are categorized into "good news" and "bad news" based on the change in their announced earnings per share. share since their last announcement, adjusted for the market average change. This table reports the abnormal (AR) and cumulative abnormal returns (CAR) for the period beginning 7 days before the announcement and ending 7 days after for the 111 companies on the NZX All index for the period January 1998 to 1 December 2002 (ie Securities Markets Amendment Act 2002 came into force). This table reports abnormal (AR) and cumulative abnormal returns (CAR) for the period beginning 7 days before the announcement and ending 7 days after for the 111 companies on the NZX All index for the period March 2008 - March 2014 (ie after the Securities Markets Amendment Act 2006 came into force).
This table reports the volume-synchronized probability of informed trade measure (VPIN) for the period starting 7 days before the announcement and ending 1 day before. This table reports cumulative abnormal returns (CAR) of different subsamples for the period starting 7 days before the announcement and ending 1 day before during the period January 1998 - March 2014. The announcements are categorized into "good news" and "bad news" based on the change in their announced earnings per share since their last announcement, adjusted for the market average change.
This graph shows the cumulative abnormal returns (CAR) for the period starting 7 days before the announcement and ending 7 days after for the 111 companies on the NZX All index during the period January 1998 - March 2014. This graph shows the cumulative abnormal returns (CAR) returns ( CAR) for the period beginning 7 days before the announcement and ending 7 days after for the 111 companies on the NZX All index over the period January 1998 - December 1, 2002. The announcements are divided into 'good news' and ' bad news', based on the change in their announced earnings per share since their last announcement, adjusted for the average market change.
This graph shows the cumulative abnormal returns (CAR) for the period starting 7 days before the announcement and ending 7 days after, for 111 companies in the NZX All Index from March 2008 to March 2014. This table reports the average abnormal returns (AR ) and cumulative abnormal returns (CARs) for the period starting 7 days before the announcement and ending 7 days after, for firms in the bottom quintile of the average percent bid-ask spread during the period January 1998–March 2014. This table reports the average abnormal returns (AR ) and cumulative abnormal returns (CAR) for the period starting 7 days before the announcement and ending 7 days after the announcement, for firms in the top quintile of the average bid-ask spread percentage for the period January 1998 - March 2014.
This table reports abnormal (AR) and cumulative abnormal returns (CAR) for the period beginning 7 days before the announcement and ending 7 days after for the smallest 20% of companies in the NZX All index, by market capitalization, during the period January 1998 - March 2014.
